#9 - JRL 7266
July 25, 2003
TIME BOMB OF LITIGATION DELAYS THREATENS RUSSIAN PRIVATIZATIONS
By Virginie Coulloudon and Victor Yasmann
Self-exiled tycoon Boris Berezovskii blasted President Vladimir Putin in an open letter published in "Kommersant-Daily" on 24 July, accusing him of pursuing a "creeping anticonstitutional coup" by attempting to redistribute private property almost 10 years after it was privatized under President Boris Yeltsin's administration. Berezovskii argued that Putin has considerable support within the state bureaucracy and that possible expropriations by the state could lead to a civil war, just as the Bolsheviks' policies did after the October 1917 revolution.
However, Berezovskii's claim that Russia is on the verge of civil war does not necessarily mean the country is indeed facing such a danger. He failed to mention that the Russian Civil War broke out, first and foremost, as a result of the Brest-Litovsk Treaty the Bolsheviks signed with Germany in 1918, not because of expropriations. However, one should not overlook the fact that prominent businessmen and even politicians are increasingly emotional when describing the situation that has arisen as a result of the lawsuits brought against the oil giant Yukos. That move has engendered serious concern about Russia's future political stability not only among the oligarchs but throughout the political elite.
In the weekly "Yezhenedelnii zhurnal" earlier this month, Rosbank analyst Valerii Petrov described the current atmosphere in the Russian market as genuine "panic." Meanwhile, Union of Rightist Forces State Duma Deputy Boris Nadezhdin in a 22 July press conference raised some of the structural issues Berezovskii mentioned in his open letter. Nadezhdin highlighted what he termed the dangerous trend of letting the state bureaucracy and various security services review former privatization bids. Addressing Putin's call for consolidation of the state and society, Nadezhdin said: "This is not consolidation. This is a war of all against all. It is a war of bureaucrats against businessmen. It is an attempt by businessmen to shape their own politics. It is finally a war of bureaucrats against political parties, as they consider one of them to be a priority and harass all others," iamik.ru reported.
The Yukos affair has reminded all investors that ownership is not a sacrosanct right in today's Russia. Although they are now resigned to the coerciveness of Russia's Customs and Tax police, many Russian businessmen openly fear that the latest developments are a sign that some privatization bids could be revised in the next few months. The reason for this, as is often the case in Russia, is to be found in the timing of the Yukos affair.
Interestingly enough, the Prosecutor-General's Office opened seven cases against Yukos just a few months before the "litigation delay" -- the 10-year period for challenging the outcome of the privatization tender -- expires. When then-First Deputy Prime Minister Anatolii Chubais launched the privatization program in 1994, most strategic privatization deals stipulated a 10-year litigation delay. Ten years after, that time bomb is about to explode and poses a serious threat to private ownership in Russia.
The privatization of state enterprises officially started in 1991-92 and was conducted in two phases. The first, known as "mass privatization," was originally intended to symbolize "popular capitalism." "What we need is millions of owners, not a handful of billionaires," then-President Yeltsin said at the time. Each Russian citizen, young and old, received a 10,000 ruble privatization voucher and the government emphasized the need to educate the population about the market economy. The creation of a system of corporate governance was considered an issue of secondary importance.
The end of the "voucher privatization" of medium and large enterprises did not mark the end of privatization. On 22 July 1994, Yeltsin issued a decree on the second phase of privatization: the remaining state holdings were to be sold for cash at competitive auctions, with part of the proceeds going to the companies as capital for their restructuring and the rest going to the government. Chubais's privatization plan implied that state companies would be privatized as quickly as possible and the process became something of a national sport.
Now, 10 years on Russia faces a crucial challenge as the legal deadlines for challenging tender results approach. This loophole in the privatization legislation now opens the way for the country's most strategic enterprises to be selectively targeted. As the Russian authorities will never be able to review all litigation cases, one can expect to see charges filed against private, strategic enterprises that are not controlled by the power elite. As is now traditional in Russia, this process will develop both at the federal and regional levels, thus allowing the power elite to strengthen its position. This is bad news for all Russian investors who attempted to eliminate the omnipresent clan logic and implement rules of transparent business.
On 22 July, Economic Development and Trade Minister German Gref declared he is against "de-privatization." However, he recently told "Vedomosti" that "one should keep in mind that there is no clear boundary between a revision of history and a crime investigation. If there were [economic] crimes committed during the privatization process, nobody will be able to stop their investigation until the litigation delay is over." Therefore, he added, "If we all can remain calm during this emotional and intense time, I am convinced that all will be fine."
This is precisely what investors are afraid of -- that the Russian state will expropriate their businesses while they are asked to "remain calm."